Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, December 31, 2010

Paul Krugman is in his element again. The Republicans control the U.S. House of Representatives and the Democrats no longer have a filibuster-proof majority in the Senate. A very liberal Democrat occupies the White House and is governing via executive orders (winning Krugman's approval, although executive orders are good only when Democrat presidents issue them).

So, even though Democrats still have the upper hand, in Krugman's mind the Republicans rule. Why? Because tax rates are not even higher than they are now. Furthermore, because the top individual income tax rate remains at 35 percent instead of being raised to 39.6 percent, all is lost because, in Krugman's view, that 4.96 difference is the difference between having a manageable federal budget and having large deficits. (Well, that 4.96 AND "death panels.")

All of this leads to a very interesting view of the Economy According to Krugman. As he wrote earlier this year, if it were up to him, ALL tax rates would rise, which would give the government more money (supposedly), lead to more spending, and give the economy a boost. (I'm not sure that Krugman's scenario would follow; when Herbert Hoover got Congress to raise taxes in 1932, revenues actually fell, but, then, Hoover was a Republican and did not have the requisite magical Krugmanian touch that Democrats have when it comes to taxes and spending.)

In his column today, Krugman accuses the Republicans of "hypocrisy," because they both support tax cuts and give lip service to balancing the federal budget. Actually, I agree with Krugman on this point, but I'm not sure the guy who accused Sarah Palin of "lying" on "death panels" and then glowingly spoke of "death panels" before denying he had claimed he really didn't mean what he just had said is someone who should call others "hypocrites."

Nonetheless, I think that we have a pretty clear picture of what Krugman believes will "revitalized" the American economy: higher taxes, more government spending, and inflation. On top of that, Krugman wants to bring back the old financial cartels that existed from the New Deal until the 1980s, not to mention other economic cartels that were prevalent under the federal government's regulatory schemes.

Those of us where were adults in 1980 can remember the outright stagflation that accompanied the government's economic policies, when inflation was in double-digits, unemployment was rising, and we saw no way out. Yet, Krugman wants to bring back those days via the resurrection of the old regulatory regimes and bursts of government spending and inflation.

Step back, folks, and take a hard look at what Krugman is recommending. This is a recipe for stagflation and lots of it. It is NOT a recipe for revitalizing our economy, period.

Economic laws have not changed. Government cannot repeal the Law of Scarcity nor can it order an economy into prosperity no matter what Krugman tells us. Indeed, what Krugman is recommending is nothing short of True Voodoo Economics.

Thursday, December 30, 2010

In writing about the recent seeming inability of New York City workers to remove snow from city streets, Paul Krugman spouts what would be the usual party line: Mayor Bloomberg was not up to the job, and it was "Bloomberg's Katrina." Why? Well, Bloomberg is not ideologically pure enough for Krugman, or so the Great Economist says.

Writes Krugman:

But he just faced a major test of crisis management — and it’s been a Brownie-you’re-doing-a-heck-of-a-job moment.

I was wondering why NYC’s storm response was such a mess; it turns out that the city administration basically refused to take the warnings seriously, long after anyone watching the Weather Channel knew that a blizzard was coming.

We have yet to find out exactly why. But this was a major fail.

However, as the New York Post writes, it seems that there also was something that Krugman ignored: union sabotage:

Selfish Sanitation Department bosses from the snow-slammed outer boroughs ordered their drivers to snarl the blizzard cleanup to protest budget cuts -- a disastrous move that turned streets into a minefield for emergency-services vehicles, The Post has learned.

Miles of roads stretching from as north as Whitestone, Queens, to the south shore of Staten Island still remained treacherously unplowed last night because of the shameless job action, several sources and a city lawmaker said, which was over a raft of demotions, attrition and budget cuts.

"They sent a message to the rest of the city that these particular labor issues are more important," said City Councilman Dan Halloran (R-Queens), who was visited yesterday by a group of guilt-ridden sanitation workers who confessed the shameless plot.

Halloran said he met with three plow workers from the Sanitation Department -- and two Department of Transportation supervisors who were on loan -- at his office after he was flooded with irate calls from constituents.

Of course, given that Krugman believes that municipal unions are good for the economy and fit his ideology, somehow that little tidbit of news managed to slip by him. No doubt, I am sure that the union leaders who made sure the streets weren't plowed also knew that the Usual Suspects and the NY Times and people like Krugman would be quite happy to cover for their ideological soulmates.

Tuesday, December 28, 2010

To "prove" his argument that commodity prices and inflation have no relationship, Krugman has a blog post in which he uses the graph below.

The problem is this: Which commodities? We have seen prices of gold skyrocket, although Krugman would regard gold as passe or even evil. But an even more important bellwether would be oil prices, since oil worldwide is denominated in U.S. Dollars. Thus, oil might well be more sensitive to changes in the value of the dollar than might other commodities.

In other words, de-homogenization might be something worthwhile here. Just a thought.

The second problem I see is that once again, Krugman uses the deus ex machina explanation of "volatility" to explain away anything that might be uncomfortable. Are oil and gold prices going up? Well, so what? They are volatile; that explains everything.

Sunday, December 26, 2010

So, Paul Krugman finally has taken notice of rising commodity prices, although the price of gold has escaped his notice. (Krugman, of course, is a true gold hater, although I would be interested to know if he has any gold holdings in his own investment portfolio.)

In his most recent column, Krugman claims that rising food and fuel prices are nothing more than evidence of an economic recovery. Nothing else. He writes:

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.

As for inflation, Krugman claims it is low, but what he means is that the government's Consumer Price Index is not rising by nearly as much as prices are rising for commodities. As I see it, however, the "Scarcity" argument really does not hold much water.

Krugman apparently believes that although the Federal Reserve System has been flooding the world with dollars via bailout loans around the world and an aggressive monetary expansion policy at home, all of those extra dollars really have no effects on prices. Yet, I believe that to be shortsighted, as the commodities markets are extremely sensitive to changes in the value of money.

However, Krugman claims that any dissent from his wisdom is nothing more than right-wing nonsense:

What about commodity prices as a harbinger of inflation? Many commentators on the right have been predicting for years that the Federal Reserve, by printing lots of money — it’s not actually doing that, but that’s the accusation — is setting us up for severe inflation. Stagflation is coming, declared Representative Paul Ryan in February 2009; Glenn Beck has been warning about imminent hyperinflation since 2008.

Yet inflation has remained low. What’s an inflation worrier to do?

One response has been a proliferation of conspiracy theories, of claims that the government is suppressing the truth about rising prices. But lately many on the right have seized on rising commodity prices as proof that they were right all along, as a sign of high overall inflation just around the corner.

Uh, I would say that stagflation (a parallel increase in the rates of inflation and unemployment) already is here, although it is not as pronounced at it was 30 years ago. But since Krugman denies that stagflation is here, then I guess it is not here no matter what the numbers tell us.

As I have said before, people have been too quick with the predictions of hyperinflation and imminent economic collapse, but given that the Obama administration's economic "recovery" program consists of spreading dollars abroad, spending, expanding government regulation, empowering federal prosecutors against business figures, demonizing businesses, continuing costly foreign wars, and expanding an already bloated and abusive "security" apparatus at home, there isn't going to be anything akin to a real recovery.

However, the things I have listed seem to be on Krugman's list of what will bring us into recovery, although I am not sure how any of what I have listed is going to result in more goods being produced and American entrepreneurship being unleashed. But Krugman is too busy creating "Jake Blues" excuses as to why commodity price increases really have nothing at all to do with the state of the U.S. Dollar. (Remember "Jake's" encounter in the sewer tunnel with his jilted lover, played by Carrie Fisher? He gives a litany of excuses, and Krugman takes the cue.)

So what are the implications of the recent rise in commodity prices? It is, as I said, a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding. This won’t bring an end to economic growth, let alone a descent into Mad Max-style collapse. It will require that we gradually change the way we live, adapting our economy and our lifestyles to the reality of more expensive resources.

But that’s for the future. Right now, rising commodity prices are basically the result of global recovery. They have no bearing, one way or another, on U.S. monetary policy. For this is a global story; at a fundamental level, it’s not about us.

I don't think so. Resources have not suddenly become finite; the Law of Scarcity did not come about yesterday. To deny ANY relationship between the surge in commodity prices (including gold and silver, Paul) and the dollar losing value is to deny reality. But Krugman is good at denying reality -- and demonizing anyone who disagrees with his Great Wisdom.

...will provide real, concrete help to tens of millions of Americans and greater security to everyone. And it establishes the principle — even if it falls somewhat short in practice — that all Americans are entitled to essential health care.

You see, Krugman was in such a giving mood that he actually believes that government can legislate away the Law of Scarcity. Unfortunately, today Krugman is not full of "tidings of comfort and joy."

No, he is upset that the "zombies" have not been kicked out of the country, or at least academe and the media. How DARE anyone be permitted to contradict The Great One in any media or academic forum!

Bob Murphy, whose debate challenge Krugman still has refused, takes the Nobel winner to task in his LRC column today, and Murphy's words are quite worth reading, although I am sure that Krugman would consider all of it to be "humbug." Murphy writes:

As far as the free-market fundamentalists dominating the political scene "more thoroughly than ever," I suppose Krugman is right, in the sense that two French poodles could dominate a pit bull more than one French poodle could. But as the Fed discloses its cumulative $9 trillion in backdoor loans, as the FBI raids hedge funds, and as federal spending as a share of the economy is at its highest level since World War II, I hardly think that DC is being overrun by laissez-faire shock troops.

Murphy continues:

To prove that free-market fundamentalists have seized power, Krugman's Exhibit A is Ron Paul:

(Krugman) How did that happen? How, after runaway banks brought the economy to its knees, did we end up with Ron Paul, who says "I don't think we need regulators," about to take over a key House panel overseeing the Fed?

(Murphy continues) Of course, if we look at the actual context of what Paul is saying, we find that he means it is foolish to trust government regulators to nip asset bubbles in the bud, while the Fed and other government programs do their part in fueling such bubbles. Ron Paul was not saying, "Let the banks do whatever they want," instead he was saying that we shouldn't be bailing them out when they screw up. Instead, let them go bankrupt just like any other business would after making horrible investment decisions.

Furthermore, the Wall Street crowd did NOT want Ron Paul as subcommittee chairman, nor does that bunch support him politically. And while Krugman supported the TARP bailout, Ron Paul campaigned against it. Yet, Krugman continues to try to portray Ron Paul as a reckless "Zombie."

Krugman is not satisfied just to disseminate disinformation about Ron Paul. No, he attacks anyone who disagrees with him and issues an outright fantasy about the state of present discourse:

Still, why does it matter what some politicians and think tanks say? The answer is that there’s a well-developed right-wing media infrastructure in place to catapult the propaganda, as former President George W. Bush put it, to rapidly disseminate bogus analysis to a wide audience where it becomes part of what “everyone knows.” (There’s nothing comparable on the left, which has fallen far behind in the humbug race.)

Yeah, there is no George Soros, who spends in a YEAR what the demonized Koch Brothers have spent in a lifetime on different advocacy organizations. According to Krugman, there is no Media Matters, no Center for American Progress, no Daily Kos, and no New York Times, Time, Newsweek, MSNBC, or Washington Post.

(I also should make the point that no one "funds" this blog or anything else that I am doing in my public criticisms of Paul Krugman. I'm just doing my "Zombie" activities on my own.)

In the end, Krugman not only bemoans the lack of an even bigger welfare state and the presence of people with the temerity to disagree with him, but he also claims that people are not standing up to the "free market zombies" because of a lack of courage. Right. Somehow, I don't think that Krugman is doing what he does because he is "courageous" and is "standing up to The Man."

Thursday, December 23, 2010

In The Return of Depression Economics (which I reviewed here), Paul Krugman writes: “Recessions, in other words, can be fought simply by printing money—and can sometimes (usually) be cured with surprising ease.”

Once upon a time, printing money was another euphemism for inflation, but in this day of Orwellian Newspeak, it is called "Quantitative Easing" or something else. (Krugman holds that inflation is measured only by indexes, so just creating more money in and of itself is meaningless.) Furthermore, according to Krugman, real-live evidence of inflation is, well, irrelevant whenever Krugman says so. He recently wrote:

For two years we’ve been warned that inflation, even hyperinflation, was just around the corner; instead, disinflation has continued, with core inflation — which excludes volatile food and energy prices — now at a half-century low. (Emphasis mine)

In other words, two situations in which you really will be feeling the brunt of higher prices is nothing more than volatility at work. However, does anyone really think that food prices will be volatile downward anytime soon?

This is part of the "heads I win, tails you lose" arguing style that Krugman employs. Housing prices have been depressed for a long time, but they were way out of kilter and even Krugman will admit that, and that has had an effect upon the price indexes.

What Krugman does not say, however, is that food, energy, and commodities in general are quite sensitive to changes in the value of money and often act as the proverbial canary in the coal mine. Because Krugman hates gold and silver (or any other kind of "hard" money) and commodities in general, anything that might reflect the fact that people are escaping the dollar and buying something that can hold its value relative to money is something that is evil.

(Of course, anyone who disagrees with Krugman on this subject is a "zombie" and not even worthy of being permitted to inhabit the same planet as Krugman.)

So, inflation is the key in Krugman's view. Save the world by flooding it with dollars or whatever, but flood the world.

Tuesday, December 21, 2010

Gee, it seems that Paul Krugman has found a new word to describe people who might actually believe that the Law of Marginal Utility applies to money and to economics in general: Zombie. In a recent blog post, he claims to be able to debunk the "myth" of "soaring federal employment," and, thus, label anyone who disagrees a "zombie."

Krugman's "proof" is the graph below, which does show that in Census years, there are temporary spikes in government employment. However, we still can see a significant growth (even without the Census workers) in federal employment since Obama took office.

As I see it, this significant increase demonstrates what many of the "zombies" (including me) have been saying: the government's policies of the last two years have turned the federal government into the only "growth" industry in the country. Furthermore, the addition of literally hundreds of thousands of government employees does nothing but increase the economic burden on everyone else.

So, who is the zombie? Could it be the guy who believes that an addition of government to be paid by everyone else is an economic "stimulus"? Oh, I forgot. "Sophisticated" economists have repealed the Law of Scarcity and the Law of Opportunity Cost.

Sunday, December 19, 2010

[Update, Monday, December 20]: In his column today, Krugman has upped the ante, now calling Ron Paul an out-and-out "zombie." Furthermore, he repeats the quote from Ron Paul but this time Krugman does not include the reference so that readers can see exactly what Rep. Paul means by his quote.

We are dealing with deceitfulness, pure and simple. Krugman is trying to make readers think that Rep. Paul approved of the behavior of the Wall Street firms and wants more of the same. As I see it, this episode highlights the fact that Krugman is fundamentally dishonest in the way he writes. If he were an honest man, he would deal with Rep. Paul's quote in full, and if he then disagreed, he could say why he thought Rep. Paul was wrong.

However, Krugman instead just uses dishonesty and personal attacks. This speaks for itself. [End Update]

I guess with Ron Paul chairing the subcommittee that oversees the Fed, Paul Krugman will be attacking him on a regular basis. Today, he has a blog post which not only misstates the Austrian position on money, but also employs logical fallacies as the basis of attack. In other words, it's another day at the office for Krugman.

Robert Wenzel has an excellent commentary on what Krugman says, and I want to emphasize with Mr. Wenzel that Ron Paul knows the difference between money supply and monetary base. This is in reply to what Krugman writes:

I used that term (paleomonetarism) — it’s probably not original, but who knows? — in a recent post about the increasingly obscure meaning of the money supply. The best example would surely be Ron Paul, who’s now going to have oversight over the Fed. If you read his stuff, it’s very clear: money is a well-defined quantity that the Fed controls, and inflation comes from — indeed is defined as — increases in that quantity.

What he means, I guess, is monetary base. (Emphasis mine)

Krugman then shows a graph which has both the monetary base and the CPI and -- Lo and behold! -- the rate of inflation does not match the monetary base. Conclusion? Ron Paul is an idiot.

As Mr. Wenzel replies (and I quote him at length):

Krugman knows damn well that the monetary base is not the same thing as the money supply--and that the distinction became important once excess reserves started piling up, to the tune of a trillion dollars, in the monetary base. Further, Krugman knows this trillion dollars in excess reserves is money sitting outside the system, i.e., it is not in the economy. It is pure evil when Krugman suggests that Congressman Paul thinks that the monetary base is the same thing as the money supply. During television interviews, I have heard Congressman Paul on many occasions comment that there was a huge amount of excess reserves in the monetary base and that it was a threat to explode the money supply. This clearly indicates that Congressman Paul knows the difference between the monetary base and the money supply. (Note: Don't send me an early clip of Congressman Paul talking about the monetary base, without reference to excess reserves, as Krugman points out, monetary base was different in "normal times". Once it became clear that excess reserves were flooding the monetary base, Congressman Paul clearly noted that the monetary base was not moving in correlation with the money supply)

Thus, the chart Krugman runs to show the supposed disconnection between the monetary base and price inflation, and implying that Congressman Paul thinks there is a connection, is deception far beyond that of his Princeton buddy, Ben Bernanke, who claimed that he is currently not printing money.

Krugman goes on with even more nonsense by calling Ron Paul's view the politically dominant view. Ron Paul subscribes to the Austrian School of Economics. While gaining in popularity, it's about as politically dominant as the legalize LSD movement.

Labeling Paul's view as the politically dominant view appears to be a slick attempt to muddy Ron Paul with the economic mess that is surely coming. "Hey, the politically dominant paleomonetarism/Ron Paul view is what got us in this mess."

Given that Krugman writes for the newspaper that desperately tried to prop up the corrupt and disgraced Michael Nifong while he pursued prosecution in the fake Duke Lacrosse Case, I am not surprised to see him deliberately misrepresenting Ron Paul's views. That's par for the course at the NYT.

Mr. Wenzel asks how Krugman can sleep at night. It's easy. The guy who writes "Conscience of a Liberal" has no conscience at all.

In a recent blog post, Paul Krugman says he admires Ron Paul's "frankness" even though he cites Rep. Paul's ideas as being "crazy." Not surprisingly, Krugman misrepresents what Rep. Paul is saying, ignores what Rep. Paul has said in the past about the financial crisis, and demonstrates his own ignorance by employing the informal fallacy of Appeal to Authority.

There have been a number of posts made to Lew Rockwell's blog about this (including a couple of my own). They are listed here, here, here, and here.

Friday, December 17, 2010

I must say that when Paul Krugman gets on a subject, he sticks with it, and the latest chapter in his "it's all the fault of free markets" mantra comes in today's column in which he deals with the report of Financial Crisis Inquiry Commission. Not surprisingly, he sticks to his other mantra -- Republicans always are the cause of all problems and ills and Democrats have all the answers -- in this screed.

Unfortunately, the one thing he does not do is to deal with the actual problem, but to Krugman, solutions to the current crisis are problems, while in his view, we "solve" this problem by, well, creating more problems.

He begins (predictably):

When the financial crisis struck, many people — myself included — considered it a teachable moment. Above all, we expected the crisis to remind everyone why banks need to be effectively regulated.

How naïve we were. We should have realized that the modern Republican Party is utterly dedicated to the Reaganite slogan that government is always the problem, never the solution. And, therefore, we should have realized that party loyalists, confronted with facts that don’t fit the slogan, would adjust the facts.

As one who has read Krugman for a long time, I definitely believe that the last statement describes him quite well. So, here we go with Krugman's "facts" about the bubble:

It’s not as if the story of the crisis is particularly obscure. First, there was a widely spread housing bubble, not just in the United States, but in Ireland, Spain, and other countries as well. This bubble was inflated by irresponsible lending, made possible both by bank deregulation and the failure to extend regulation to “shadow banks,” which weren’t covered by traditional regulation but nonetheless engaged in banking activities and created bank-type risks.

Then the bubble burst, with hugely disruptive consequences. It turned out that Wall Street had created a web of interconnection nobody understood, so that the failure of Lehman Brothers, a medium-size investment bank, could threaten to take down the whole world financial system.

Now, it is true that, in George W. Bush's words, "Wall Street got drunk," but as Peter Schiff noted in a speech at the Mises Institute in 2009, there is this little issue of who was supplying the liquor -- the Federal Reserve System. As I have noted before, the government has a number of programs to extend home ownership well beyond its logical bounds and there was pressure from authorities for banks to throw away the underwriting standards for mortgages. That this would build up into a bubble is no surprise.

There also is the matter of Lehman Brothers. I'm sorry, but the notion that the reason we had this crisis is because the government let Lehman fail is a bit much. Wall Street as a whole was overleveraged, but unlike Krugman, who wrongly says that it was because banks and the "shadow banks" were operating in a market totally unregulated by government, it seems to me that the famed "Greenspan Put" that also was part of Fed policy under Ben Bernanke created huge moral hazards that encouraged this drunken spree.

In Krugman's Keynesian world, markets don't respond to price signals, as prices have meaning only in the aggregate as part of an index. Things like relative prices and profits are meaningless, which is why Krugman can claim that the heavily-subsidized industry of "alternative energy" can lead us out of this depression. (Krugman does not seem to believe that free market profits have anything to do with the valuation of the factors of production, and why should they, given that in the Keynesian view, factors are homogeneous, economically speaking.)

Krugman's defense of Fannie and Freddie is pretty hilarious:

In the world according to the G.O.P. commissioners, it’s all the fault of government do-gooders, who used various levers — especially Fannie Mae and Freddie Mac, the government-sponsored loan-guarantee agencies — to promote loans to low-income borrowers. Wall Street — I mean, the private sector — erred only to the extent that it got suckered into going along with this government-created bubble.

It’s hard to overstate how wrongheaded all of this is. For one thing, as I’ve already noted, the housing bubble was international — and Fannie and Freddie weren’t guaranteeing mortgages in Latvia. Nor were they guaranteeing loans in commercial real estate, which also experienced a huge bubble.

Beyond that, the timing shows that private players weren’t suckered into a government-created bubble. It was the other way around. During the peak years of housing inflation, Fannie and Freddie were pushed to the sidelines; they only got into dubious lending late in the game, as they tried to regain market share.

In this view, Freddie and Fannie were the victims of those rapacious capitalists. There was no subprime market; the Fed had nothing to do with this, and government came in on the tail end of things.

This is NOT a defense of Wall Street or the Republicans. I will say outright that one cannot have both a deregulated financial system AND something like the "Greenspan Put." It is not possible because the kinds of moral hazards that such policies create are such that we should not be surprised when we see a meltdown of this magnitude.

I don't think the banks were "suckered" by the government; they were in bed with the people who were supposed to be regulating them. Unlike Krugman, however, I don't think that this lack of oversight was due to free market ideology, as I know no free-market economist who believes that markets and moral hazard can exist simultaneously without creating real problems.

No, people were getting rich and not having to work very hard at it. As in a bubble atmosphere, even if everyone knows there is a bubble, the trick is to jump off before the whole thing peaks and then pops.

Because Krugman is stuck in his ideological and political ghetto, he really offers nothing but inflation as a "solution." He claims to understand the effects of financial bubbles, but his ideology, partisanship, and Keynesian thinking blinds him to the cause of bubbles. And if he cannot understand the cause of the problem, he hardly is qualified to recommend solutions.

Monday, December 13, 2010

Even when Paul Krugman gets it right, he still manages to get it wrong. Thus it is today that in his column, he starts out on the right track, but then misinterprets what is in front of him and then goes off on yet another Keynesian spiel.

First, I present the good stuff. Krugman writes:

The root of our current troubles lies in the debt American families ran up during the Bush-era housing bubble. Twenty years ago, the average American household’s debt was 83 percent of its income; by a decade ago, that had crept up to 92 percent; but by late 2007, debts were 130 percent of income.

All this borrowing took place both because banks had abandoned any notion of sound lending and because everyone assumed that house prices would never fall. And then the bubble burst.

While he is right as far as he goes, unfortunately, Krugman the economist does not ask why the banks played the "band in 'Animal House'" role in thinking they could march through the wall. Why did banks abandon "sound lending" principles?

Krugman would answer that a Republican administration was full of free-market types that believed banks should not be regulated, and that suddenly, all bank regulators believed that market hype. That does not square with what we know about government and governance.

Krugman fails to point out that the housing market is heavily subsidized and regulated by government and was so even before the mortgage industry essentially was nationalized during the last year of the Bush administration. Indeed, as one real estate attorney told me last year, the government actively was urging banks to abandon lending standards in the name of promoting more and more home ownership.

At the same time, the Heritage Foundation and Cato Institute were promoting the "Ownership Society" mantra and the Bush administration was bragging that it had put more minorities into home ownership than ever before. I'll go further. The "subprime market" never would have taken off in a free market, not without real safeguards built into the system, which contrasts with the moral hazard that existed as the government told lenders directly and indirectly that the taxpayers had their backs.

That part never makes it into Krugman's narrative, and no wonder. If government played a role by pushing vast amounts of resources into unsustainable markets and promised to make good on bad loans, then no one should be surprised at what happened. Furthermore, there is no such thing as a free market in which those taking the risks don't have to bear losses, which clearly became the perception.

Unfortunately, that is the soundest argument Krugman makes in this column, and from there he goes off the Keynesian deep end. He writes:

What we’ve been dealing with ever since is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years. This would be fine if someone else were taking up the slack. But what’s actually happening is that some people are spending much less while nobody is spending more — and this translates into a depressed economy and high unemployment.

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained: we’re not talking about a brief burst of aid; we’re talking about spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived, with much of the positive effect already gone.

How, pray tell, does the government get the money to make up for all that lost consumer spending? As Krugman has said earlier, he believes that ALL of the Bush tax cuts should be permitted to expire, and that if he were in charge of the government, he would take that extra revenue and spend it.

Of course, taking money from people just makes them poorer, and the idea that government spending would make up for their loss is a howler. Contra Keynes and Krugman, governments make sure that friends are benefited and enemies punished. The second way for government to get money, according to Krugman, is to borrow (and borrow and borrow).

Here is where it gets interesting. Who is on the hook for all of this money? Obviously, the debt must be repaid or there has to be a default. Obviously, the government chooses default by inflation, with Americans being told they can have their cake and eat it, too. I hate to be the bearer of bad tidings this Christmas season, but paying back the debt by inflation is not the "free lunch" Krugman claims it to be.

(Remember, he declares in The Return of Depression Economics that there really is a "free lunch," and that all we have to do is to find it. The "free lunch" is the taking on of huge debt, and then quietly repudiating it by destroying the U.S. Dollar. Yeah, as if there are no consequences from so doing.)

In Krugman's economy, we move seamlessly from the housing bubble to continued full employment, just as long as government, people -- someone -- is spending money. This is a view that says resources don't matter, that factors of production are homogeneous, and that there really are no consequences at all for driving entire markets into a big hole via malinvestments.

In other words, it is economics as though the Law of Scarcity did not exist.

Friday, December 10, 2010

I must admit I enjoy reading Paul Krugman's material on the NY Times page if for no other reason than he does a good job of explaining bad "economic theory" in the form of what Robert Higgs calls "vulgar Keynesianism." While today's column primarily is political in nature (and no one politicizes economics more than Krugman), he also lays out the keys to understanding how Keynesian "logic" actually works.

Now if one were to have a conversation with Krugman, one would find that he actually believes in the Law of Scarcity, the Law of Demand, and the Law of Opportunity Cost. Furthermore, I doubt seriously that he believes these things can be repealed, even by a mythical President Krugman.

Yet, when put into a macroeconomic framework, Krugman's economic thinking is based upon a view that the "rule" somehow are different at different stages during the business cycle. For example, when things are relatively good, then one set of rules apply, and when the economy is in the tank -- as it is now -- one goes by another set of rules. And so it goes.

I will take the liberty to say that Krugman believes that a capitalist economy suffers from what might be "internal contradictions" (I use that term carefully, as Marx used it and Krugman is not a Marxist) that tend to bias economic performance downward. The logical progression goes in the following manner:

People produce goods and are paid;

They take that money and "buy back" the goods that they make.

As long as people are able to "buy back" everything they have created, then all is well. However, the "internal contradiction" tends to be seen here:

People save part of the income they receive;

Savings tends to be greater than investment (the banks and other savings institutions tend to invest less than they take in as deposits);

Not enough money is available to "buy back" the created products;

Therefore, this "underconsumption/overproduction" cycle leads to layoffs as firms quit making goods so that they can sell off their inventories.

That pretty much is the Keynesian explanation of what is happening, and if one reads Krugman, one finds that he is operating on two fronts regarding any cut in tax rates for people he calls "the rich."

Wealthy people do not consume their entire paychecks at one time, so they have a greater "marginal propensity to save" than do people with lower incomes, which means that their spending/savings ratio creates problems for the economy;

Wealthy people tend to be more responsible for economic downturns because they don't spend everything at once, which is why they need to have large portions of their income taxed away so that government can do the responsible thing and spend.

Keynesians refer to the "multiplier," which is 1 over the MPS (Marginal Propensity to Save, or 1-MPC, the Marginal Propensity to Consume), and the greater the "multiplier," the better the economy performs. Obviously, the less that is saved, the greater the "multiplier," although Keynes adds that zero savings would bring about hyperinflation.

However, in the Keynesian view, the more government can drive down the savings rate to as close to zero as possible, the better off we will be, and the only way to do that is for government to make saving money as unattractive as possible. This noble goal of government can be accomplished in the following ways:

Inflate the money supply by enough to discourage present savings, as the value of money depreciates so quickly that to hold any money to spend in the future would be pointless;

Have high progressive tax rates to confiscate "idle money" from the wealthy so that government can quickly spend and bring the economy back to full employment;

Have government aggressively borrow money in order to lap up any other idle funds.

As for capital, well, in the Keynesian view, capital simply happens. Furthermore, capital investment at a time like this is useless because of "excess capacity."

There are a number of other implications in all of this, and when one adds Krugman's own belief that a society that is based upon a cradle-to-grave welfare system along with other restrictions is preferable to what he sees as a society governed by the "animal spirits" of capitalism, the logical progressions are obvious. Furthermore, in Krugman's view, markets that are not boxed in by rules set by government agencies always run off the cliff, as all investors are short-term oriented (as are Keynesians) and are not deterred by changes in relative prices, since Keynesians don't believe that prices have any significance except when aggregated in to various price indices.

Furthermore, in Krugman's view, no one would be willing to invest in new capital, given that the economy already suffers from "overcapacity," so any cut in tax rates for wealthy people would be pointless and most likely would further drive down the economy. Only government can make things right, and that government must be run by people who think like he does.

So, when one reads Krugman's columns, these are things that are under-girding his statements. Now, I think that Keynesian thinking was wrong in the 1930s, it is wrong today. I'll address my concerns in my next post.

Monday, December 6, 2010

In 1932, the U.S. economy was in a depression with double-digit unemployment, and the end was not in sight. President Herbert Hoover, faced with both an imploding economy and growing budget deficits, Hoover opted for the Paul Krugman solution: raise taxes.

We know how this story came out. The tax increases not only failed to raise the revenue, but the nation's unemployment rate went up even faster, peaking at 28 percent in February 1933, a month before Franklin D. Roosevelt was inaugurated as Hoover's replacement.

This bit of history has been shoved down the Orwellian Memory Hole by politicians, "distorians," and economists. In his column today, Krugman continues that sorry tradition.

Before going on, I will say that I am not impressed by the Republicans' "low-tax" rhetoric, given that government spending itself is a tax. (One does not even have to hold to perfect Ricardian Equivalence to make that statement.) Nonetheless, I don't think that Krugman's argument here is valid, and the premises from which he builds his argument are ridiculous.

As a "macroeconomist," Krugman operates from a completely different set of "opportunity costs" than what the Law of Scarcity describes. In Krugman's view, the "cost" comes when an individual keeps money he or she has made instead of having it confiscated by the government. (The Keynesian Balanced-Budget Multiplier "proves" that tax increases always have a positive effect and are more economically efficient than the result when individuals keep their money.)

Thus, when money is not confiscated from productive people, that is a "cost" to the country. Obviously, it would not take long to create the Reductio ad absurdum scenario, and I don't think that the person who told a roomful of economists in November 2004 that the pre-1981 70 percent tax rates were "insane" is going to agitate for super-high tax rates. At least not yet.

However, Krugman seems willing to accept anything the Congressional Budget Office produces (at least when the CBO is under control of the Democrats), and I will say that the semi-rosy scenario he claims would be the case if all tax rates rise to their pre-2003 levels is fantasy. He writes:

A few months ago, the Congressional Budget Office released a report on the impact of various tax options. A two-year extension of the Bush tax cuts, it estimated, would lower the unemployment rate next year by between 0.1 and 0.3 percentage points compared with what it would be if the tax cuts were allowed to expire; the effect would be about twice as large in 2012. Those are significant numbers, but not huge — certainly not enough to justify the apocalyptic rhetoric one often hears about what will happen if the tax cuts are allowed to end on schedule.

How the CBO even can come up with something like this is ridiculous on its face. It really seems to be based upon the belief that individuals don't change their behavior at all when taxes are increased or decreased.

Now, I have not read any apocalyptic predictions on the pro-tax cut side, although Krugman has been throwing out enough doom to make up for any ridiculous claims from the Republicans. For example, he writes:

But while raising taxes when unemployment is high is a bad thing, there are worse things. And a cold, hard look at the consequences of giving in to the G.O.P. now suggests that saying no, and letting the Bush tax cuts expire on schedule, is the lesser of two evils.

Bear in mind that Republicans want to make those tax cuts permanent. They might agree to a two- or three-year extension — but only because they believe that this would set up the conditions for a permanent extension later. And they may well be right: if tax-cut blackmail works now, why shouldn’t it work again later?

America, however, cannot afford to make those cuts permanent. We’re talking about almost $4 trillion in lost revenue just over the next decade; over the next 75 years, the revenue loss would be more than three times the entire projected Social Security shortfall. So giving in to Republican demands would mean risking a major fiscal crisis — a crisis that could be resolved only by making savage cuts in federal spending. (Emphasis mine)

This really is akin to the scene in "Animal House" in which the band tries to march through a wall. Does Krugman really believe that the ONLY change would be revenues, and that the U.S. economy would perform just as before with the only difference being that the government would be in possession of $4 trillion more than if the lower rates remain? Furthermore, when government takes money from individuals, does that mean that the "country" always is better off?

This is an interesting line of thinking. According to Krugman, the government is the "country," and the "country" is us. So, if the government has more money, then "we" always are better off -- except for those millionaires who always gain their wealth at the expense of everyone else.

There is nothing in Krugman's writings that would suggest that the optimum tax rate would be 100 percent on ALL private income. I am serious. If Krugman's view of the "country" is the government itself -- and his language points to that belief -- then the "country" is at its best when it has everything that everyone has produced.

Now, I doubt that even Krugman would be willing to give us this kind of scenario, although I never have read anything from him in recent years that would refute it. Instead, he tries to convince us that if individuals are permitted to keep $4 trillion of income (which I doubt would be the case -- those are unrealistic numbers, in my view), that it would be a "cost" to the "country." However, if the government is permitted to confiscate that $4 trillion, then we are better off, since "we" would be the "country."

In Krugman's world, if an individual is permitted to keep any income, that is a "cost" to the country, and even though the individual is made worse off if the money is confiscated, it is a "benefit" to the "country," given his own rhetorical definitions. So, we can have the scenario in which all individuals are made worse off, but the "country" is made better off.

That is economics? I don't think so. It is nothing but absurd set of political talking points.

Friday, December 3, 2010

When Paul Krugman won the Nobel Prize in economics in 2008, blogger Don Luskin wrote tongue-in-cheek that it was the first time that the Swedish central bank had given the award to a "dead economist." Luskin was joking, of course, as everyone knows that Krugman is a living and breathing human being, but his point was that Krugman long ago had given up economics for political partisanship and for what Robert Higgs calls "vulgar Keynesianism."

Lest anyone think that Krugman actually tries to make an economic argument from his New York Times perch, well, think again. Here is someone supposedly of intellectual stature trying to claim that if governments only spend enough money, that the spending somehow will permanently revitalize the economy. In other words, we spend ourselves rich.

When Barack Obama was elected President of the United States two years ago, Krugman was among those shouting the "hosannas" and throwing palm branches at the feet of the Messiah. (Of course, Obama did not ride into Washington on the back of a donkey colt, but rather in a gas-guzzler limo.)

Today, however, the hosannas have stopped, at least on Krugman's page, and while he is not yet in the mob shouting, "Crucify him!" nonetheless, I can see that the Messiah already has lost favor and most likely Krugman will be looking elsewhere -- perhaps to Hillary Clinton. In today's column, Krugman essentially rejects Obama because he thinks that the president is not doing enough to spend ourselves into recovery.

This is couched in the language of the federal deficit of course, and Krugman's view that the government under Obama is not confiscating enough income from everyone else:

After the Democratic “shellacking” in the midterm elections, everyone wondered how President Obama would respond. Would he show what he was made of? Would he stand firm for the values he believes in, even in the face of political adversity?

On Monday, we got the answer: he announced a pay freeze for federal workers. This was an announcement that had it all. It was transparently cynical; it was trivial in scale, but misguided in direction; and by making the announcement, Mr. Obama effectively conceded the policy argument to the very people who are seeking — successfully, it seems — to destroy him.

So I guess we are, in fact, seeing what Mr. Obama is made of.

Now, given that millions of Americans have lost their jobs or taken pay cuts, the fact that federal employees will not be receiving pay raises for a couple of years is pretty mild stuff, and Krugman's over-the-top reaction tells us more about his priorities and agenda than it does about anything Obama has done. He goes on:

The truth is that America’s long-run deficit problem has nothing at all to do with overpaid federal workers. For one thing, those workers aren’t overpaid. Federal salaries are, on average, somewhat less than those of private-sector workers with equivalent qualifications. And, anyway, employee pay is only a small fraction of federal expenses; even cutting the payroll in half would reduce total spending less than 3 percent.

So freezing federal pay is cynical deficit-reduction theater. It’s a (literally) cheap trick that only sounds impressive to people who don’t know anything about budget realities. The actual savings, about $5 billion over two years, are chump change given the scale of the deficit.

Of course, it is political theater, as though anything a president does these days is anything but. However, Krugman goes to his own political theater in his insistence that we pretty much can cure all of our economic ills if the tax rate for families making $250K or more a year goes from 35 percent to 39.6 percent, and we steeply raise capital gains taxes and inheritance taxes.

I have no idea as to the tax revenue that would be "lost" if the current tax rates are made permanent (although "permanent" in federal budget language is rather a fluid concept), but I do think that the political theater that Krugman is making is rather telling. You see, Paul Krugman really does want us to believe that we don't need capital investment (other than "massive public works"), and that our economy can prosper just as long as the government spends and spends and spends.

For that matter, I wonder why Krugman does not advocate a 100 percent tax on all of our income, and just let the government spend money, given that the "multiplier" would be at its highest level with such a scenario. Given that governments are not "income constrained," we can end this recession immediately.

Krugman's "no tax cuts for the rich" rhetoric largely is symbolic, as his real beef with Obama is that the government has not confiscated enough of our wealth. As he has written before, if it were up to him, he would let ALL tax rate cuts expire and then have the government go on a spending spree.

So, to follow Krugman's chain of logic, Obama is now out-of-favor because he is not spending and taxing enough. Maybe Hillary Clinton will be the Chosen One. Or maybe Krugman himself.

Wednesday, December 1, 2010

In his best seller The Return of Depression Economics (which I had my MBA students read this past year), Paul Krugman writes: “Recessions, in other words, can be fought simply by printing money—and can sometimes (usually) be cured with surprising ease.”

Indeed, as I read his latest string of columns that increasingly are laced with partisan invective and personal attacks, there is one constant theme: government needs to fight this downturn by churning out new money and quickly spending it. There are problems, however, when political bodies like Greece and Ireland fall into crisis because their currency, the Euro, is created by the European Central Bank.

In Krugman's view, the solution always lies in creating more money, and since he thinks that Europe is being stingy, he has been writing that the real shame is that Ireland, Greece, and Spain cannot "devaluate" in the way that Iceland has done. As I see it, if printing money would work for Iceland, then it would work for the biggest banana republic in the USA (which increasingly is becoming a banana republic, itself), California.

Yes, debt-and-deficit-riddled California, the once-Golden State now has become a prisoner not only of its mismanagement of prosperity, but also of the leftist ideology that is its governing philosophy. The state that gave us Apple Computer and Google now gives us bloated government worker unions, high tax rates, ridiculous regulations, a swarm of bureaucrats, and Nancy Pelosi.

California now is at the end of the line. It is driving out businesses, criminalizing and demonizing entrepreneurship, and things only will become worse. What to do? Why, there is only one thing to do: print money.

Of course, California is part of the big political union called the USA, but it seems to me that a "Krugman solution" already has been reached: government scrip. Yes, the outgoing Guhvuhnatuh, Ahnuhld Himself, used IOUs to pay California workers, and if Krugman is to be believed (and he IS a Nobel Prize winner, after all), then California really has no budget problems at all.

Yes, the Ultimate Chartalist Solution is at hand, and I hope that Krugman will recognize it, since he already has supported the concept of the idea. California can stop paying its workers in USD and use its own scrip. Given the state legislature's penchant for passing law after law, it can declare the scrip to be California legal tender and ORDER state businesses to accept it, on pain of workers and business owners going to prison.

(This would be quite appropriate, since one of the fastest-growing areas of criminal prosecution in this country has been the category of "economic crimes," as the USA borrows from the legal past of the USSR.)

Granted, there might be a showdown from Washington, although I figure that since Democrats control the executive branch of the U.S. Government and the U.S. Senate, and children in California DID sing praises to Obama ("Obama's gonna save us"), perhaps the god in the White House will relent and let California carry on its Krugman scheme.

Everyone would be happy, I guess. California would not be "budget constrained," the state could multiply its bureaucracies, authorities could arrest and try more business owners, Google could be used to spy on capitalists and other evil-doers, and there would be enough money for all!

Furthermore, California could enjoy an "export boom." (I'm sure Krugman would like that.) True, the only thing the state could export would be bureaucracy and videos of children singing praises to Obama, but that should be enough to entertain the masses. (California would NOT be able to use "Yes, We Can!" as its state slogan, since Obama already took that one. Maybe the incoming Gov. Moonbeam might employ "Accept our money -- or else" as the state slogan.)

So, all it takes is guts, I suppose. Make Paul Krugman California's secretary of the treasury and the country will take off. Moonbeam, you have a mission!! (It cannot be a "mission from God," however, as California intellectuals are godless.)

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).